INJECT NEW LIFE

UAE, Abu Dhabi 2014 | ENERGY | VIP INTERVIEW

TBY talks to Carl Sheldon, CEO of TAQA, on diversification efforts, investment opportunities, and acquisitions.

Abu Dhabi is moving forward in diversifying its economy away from oil and gas. What potential do you see in the sector and what trends are you seeing?

There are two trends in this area that present TAQA with opportunities. On the one hand, Abu Dhabi is in the process of diversifying its economy, while on the other hand the whole world is wrestling with its fuel mix. It is part of Abu Dhabi's vision for 2030. Abu Dhabi recognizes that the age of fossil fuels will end, and it has to plan for that world. The process of moving the economy away from primary commodity exports at the same time as the world wrestles with its fuel mix brings a set of opportunities. We are in a unique position because not only do we have those scaled businesses in other markets, but we are present throughout the value chain. Part of our mission is that we are scale players in all our businesses in other markets, and we are owner-operators of these businesses; meaning we have large operating businesses in the rest of the world. We are the largest UAE investor in Ghana, Morocco, the Netherlands, the UK, and Canada. We have large businesses in the oil and gas and power sectors, where the license to operate is a very important element because these businesses are capital intensive, highly regulated, and of significant importance to the host government.

How do your renewable projects tie into that vision?

Renewables are clearly going to play a much more important part in the fuel mix. It is an opportunity because you don't have the same incumbency you would have in other energy markets, which tend to be dominated by the major players. We are keen to be in renewables, for both big and small reasons. First, because it is inescapably important to changing the fuel mix; second, because you can be distinctive by being a master of technology in a niche area. In this area, we have advantages because we understand how energy efficiency systems work together, which is applicable to fossil fuels and renewable energies. In Abu Dhabi, there is a big opportunity because this is a large enough market to be meaningful. It is a market in which we have an extremely high influence, meaning if we start a demand-side management program here in Abu Dhabi, a city of a million people that will reach 3 million in a decade, we have got a test market there of credible scale that we control.

“Renewables are clearly going to play a much more important part in the fuel mix."

One of your high-profile acquisitions was made in the North Sea in 2008. What opportunities are you seeing five years on?

The North Sea was a highly productive reserve beginning in the 1960s running all the way through. It has moved more into its later life and there won't be any more large discoveries. You aren't going to get 100,000 barrels per day (bbl/d) to 300,000 bbl/d, but there is still a lot of oil and gas to be recovered. What that means is that the North Sea oil fields have steadily become less attractive to the major players. Our first stage of play in 2008 was acquiring Shell's and Exxon's assets in the Brent system. That is a massive production site. When we took them over they were doing 22,000 bbl/d. Now, those same assets are doing 50,000 bbl/d. We have proven that we can take late-life assets, stop the decline in production, and push it in the other direction. We have acquired a suite of assets from BP around the Harding Platform, which is in the central part, and this provides us with another hub. Everything in the northern area runs through the Brent System and that runs across Cormorant Alpha, meaning it is bottlenecked around the one platform. We are vulnerable there in that if something goes wrong, then we are shut in. We really wanted to find an asset in the North Sea that gave us another hub that was a first-generation asset, and gave us significant current production while bringing more gas into our portfolio. What we didn't want was our production plateau to go into decline before our development projects come on-stream. We looked hard for assets that fitted the bill, and the deal we did fit perfectly. It has essentially secured and stabilized the reserve life of our North Sea business for 10 years. It puts us in a position to be able to play the end game of the North Sea.

What is the scale of development you are anticipating in the Cladhan oil field?

We haven't got the full development plan sorted out yet. Ultimately, it depends on our understanding of the structure. With Cladhan and Darwin, if they are big enough, we are hoping to put in a new platform close to Cormorant Alpha, which would then enable us to develop those reserves over a new platform. This would allow us to steadily replace infrastructure on Cormorant Alpha. We'd put in a platform big enough to be able to support Cormorant Alpha as we decommission it. That is actually quite attractive to us as it is a way of managing two problems; while we decommission the old platform, we develop a new one, meaning we don't lose any production time.

What role will TAQA play in the signing of a deal between the UAE and Turkish governments to develop energy plants and mines in Turkey?

The inter-government agreement has been signed. Underneath that is a Memorandum of Understanding (MoU) between TAQA and EÜAŞ, which is the government-owned Turkish energy generating company. Together, we will develop power plants in the Afşin-Elbistan basin in south-central Turkey, where there is a huge lignite deposit. It has probably got fuel to produce 7,000 MW-10,000 MW of power. We will start by buying an existing plant, the Afşin-Elbistan Plant B, which is a 1,440 MW lignite burner operating now. Over time, we will build a series of plants. There is a total potential in the region for 11,000 MW, but we are not committed to that. We are committed to buying the first plant and developing around it as is feasible; that is our role in Turkey. We have looked at Turkey for a long time, and we like the growth dynamics there.

Which of TAQA's high-profile series of global acquisitions are most significant, and how would you evaluate their quality?

Our recent acquisitions have been very measured. They haven't been opportunity led. In the early days of the company, we had IPO proceeds, a credit rating, and access to capital. We did deals where the discriminating factor was low-cost capital. Until we made the acquisition, we didn't have the expertise. As it happens, all of the acquired businesses have high going concern resilience, so we have the luxury of having time to reshape the portfolio. In the last three to four years, we have devoted ourselves to essentially disposing of what we foresee as non-performing assets and put that money into our other businesses. We have spent our time concentrating on our portfolio and then devoting our time developing organic projects. We are spending about $2 billion a year on capital expenditure (CAPEX) in projects within our existing businesses. Between 2010 and 2014, we will spend about $10 billion in total on developing projects inside our existing portfolio—drilling in western Canada, the UK's North Sea, the Bergermeer gas storage project in the Netherlands, the Jorf Lasfar power plant expansion project in Morocco, and our Takoradi expansion in Ghana. These are our five major spending programs. They are all developing value-accruing projects inside our existing footprint. The focus of the company changed when I took over, changing the strategy from growth by acquisition to stabilize the business and develop value opportunities. Now we are four years into that five-year program, and we are starting to see that spending turn into money. The free cash flow dynamic has started to change dramatically. We have focused more strategically on our country's entry into Turkey and Iraq, while stabilizing the North Sea business and generally trying to develop our future business opportunities around three factors. The first is what Abu Dhabi brings to this; for example, is there something in our ability to trade as a government-related entity of the Emirate? Second, do we have existing business synergies? And, third, do we have the resources? Where those three circles intersect will be the sweet spot on our strategy map.

© The Business Year - June 2013